Why not benchmark RBS bonuses against the Bank of England?

Sir Philip Hampton, chairman of Royal Bank of Scotland, argued that the board was trying to 'reconcile the competing objectives of all our stakeholders'. Photograph: Christian Sinibaldi for the Guardian

You smell a set-up? Come, come. Part-time director Penny Hughes, chair of the RBS pay committee, surely isn't paid £130,000 a year to read leaks to the FT. The performance of RBS's core business had to be benchmarked against other banks. The sale of non-core assets was assessed. The board had to look at how a "new risk appetite framework has been embedded". Or so the RBS statement, desperately scrambling for an explanation, said.

In the same statement, chairman Sir Philip Hampton argued that the board was trying to "reconcile the competing objectives of all our stakeholders". This was closer to the nub of RBS's real argument for awarding Hester more than his £1.2m salary. Hampton did not spell out the competing objectives, but let's assume one is the supposed critical need to retain the services of the current crew of directors. The RBS board is, in effect, saying: you may not approve of how much we're paid, but hold your noses because the state's 83% stake in the bank would be worthless without us.

But is this really true? Are these RBS executives so valuable that the bank would fall apart without them? Does the threat of mass resignations, even if unspoken, have force?

At a push, it's possible to agree that RBS is healthier than the weak pulse in the share price (halved over the past year) might suggest. The bank has indeed sold off past follies — aircraft leases, pub estates, etc — at a reasonable pace. It is a substantially less risky enterprise than when Hester arrived in 2009.

All the same, it remains 83%-owned by the government and will not be returning to the private sector any time soon since the shares would have to double in value just to reach the break-even point. The government, if it doesn't wish to be held to ransom at bonus season every year, should be asking whether a different cast of credible directors could be assembled at a lower price. Alternatively, it should demand that the current board, so keen on benchmarking, adopts a new benchmark for pay.

Five central bankers

On both fronts, the Bank of England might be a good place to look. Governor Sir Mervyn King received £305,000 last year. His two deputies, Paul Tucker and Charlie Bean, got £259,000 each. Further down the ladder, Paul Fisher, in charge of money market operations, and rising star Andrew Haldane took home £188,000 each. Add up those totals to get £1.2m. That's Hester's salary, even before his bonus and long-term incentives. Five for the price of one.

Of course, central banking and commercial banking are different jobs. But, come on, it's perverse to tolerate salaries at an 83% state-owned bank that are wildly out of line with those at the Bank of England. They are both organisations that, ultimately, answer to the public. And, even if one argued that Hester required danger money to enter RBS in the first place, what about the rewards being collected by others on the RBS board? Hampton, as part-time chairman, receives £750,000 — more than twice the governor's pay and a sum that even surprises some other heads of FTSE 100 companies.

As it happens, King opined on pay this week — he may have picked his moment carefully. "The legitimacy of a market economy will inevitably be challenged if rewards go disproportionately to a small elite, especially one which benefited from the support of taxpayers," he said. "Those taking decisions on remuneration, in the financial sector and elsewhere, need to understand that a market economy rests not just on incentives, but on the acceptance that the distribution of rewards is fair. That sense of fairness underpins the commitment to a market economy."

The sense that RBS is abusing notions of fairness, and that the board is simply ignoring the rules of the game, explains why this year's outcry over bonuses feels more intense than last year's. Would Hester have walked out if he had been offered £500,000 instead of £1m? That is hard to believe.

Ministers are correct when they say the last Labour government created the problem by stuffing the RBS board with private-sector bankers with private-sector pay arrangements. But it is wrong to pretend that its hands are still tied, and that it can only drop hints about bonuses the day before the board meeting. If the government wishes to appoint new directors or insist on smaller bonuses, it is free to do so — that's the power of being a majority shareholder.

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